The low interest rate environment and demand for high-quality, short-duration paper continued to fuel demand for auto ABS and other consumer assets in September. The market absorbed $18 billion of new issuance through Sept. 17, according to a JPMorgan Securities report published on that date.
In another report published that same day, Bank of America Merrill Lynch analysts said issuance has maintained a weekly average of $4 billion for the year to date, putting volumes at $146 billion, up 18% over 2011 volumes.
Auto-related ABS has been by far the busiest sector this year. Among notable deals last month, BMW Financial Services returned to the new-issue market for the first time since 2009 with $750 million of bonds backed by dealer floorplan financing.
Subprime auto issuance also gained traction as United Auto Credit priced its first deal on Sept. 20 sized at $184 million and Westlake Financial Services also priced its third transaction on Sept. 19, offering investors $377 million.
Westlake paid an average yield of only 0.73% to investors on its offered certificates. Two junior tranches were retained by the company. United Auto Credit offered an average yield of 1.85% to investors across the capital structure.
Compared to offerings from larger and more frequent auto ABS issuers, subprime offerings are typically less liquid. In the secondary market, these bonds trade using the spreads in new-issue transactions from similar issuers, Nomura analysts said in a Sept. 21 report.
Effects of QE3
The Federal Reserve's announcement of another round of quantitative easing should help keep ABS in demand, although there are differences of opinion as to how strong the impact will be. The central bank plans to buy $40 billion in agency mortgage bonds per month, increase its holdings of longer-term securities by $85 billion monthly until year end, maintain exceptionally low interest rates and continue "Operation Twist" through the end of 2012.
Fitch Ratings said the Fed's plan to lower or maintain the already low level of interest rates could help the recovery in the residential real estate market, which is a positive for the private-label RMBS market. However, it does not expect the central bank's purchases of mortgage-backed securities to impact the credit of current private-label RMBS transactions.
Fitch said the maintenance of low interest rate levels could also have a "remotely positive" impact on other sectors of the ABS market, including auto and credit card ABS, by keeping borrower interest rates low.
Other analysts said esoteric and off-the-run sectors are also benefitting from the QE3-induced rally in credit markets. According to Babson Capital's Sept. 14 market update, whole business and container ABS, two of the most liquid off-the-run sectors, tightened by about 20 basis points after the announcement. "These sectors had experienced a fair bit of tightening in the past three months, and the recent move has them at their all-time tights," they said.
A number of deals backed by off-the-run assets, including rental cars, containers and timeshare receivables, came to market during the month. Enterprise Fleet Financing brought its second rental fleet ABS deal of the year sized at $600.8 million, and Beacon Container Finance debuted in the securitization market with a $200 million deal backed by container leases.
Deals like Beacon's have been well received. According to Nomura analysts, Cronos priced its $300 million, five-year bond at a yield of 3.85%. That was significantly lower than the 4.25% it had to pay on its previous offering in May.
Nomura noted that the tighter spread on Cronos' latest deal that priced on Sept. 21 comes after insurance companies that are big buyers of these securities revised their target yields lower; the deal also benefitted from growing interest from money managers investing in the sector.
"The performance of container lessors has remained resilient to the increase in fuel prices and slowdown in global trade that has impacted the shipping lines," analysts said. "We think that container ABS performance should remain strong with the container lease rates holding up well in the medium term."
The timeshare sector also saw activity in September with timeshare sales company Bluegreen Corp. announcing on Sept. 13 that it had completed a $100 million private placement of investment-grade, timeshare loan-backed notes.
Westgate Resorts also priced its $221 million timeshare ABS deal on Sept. 19 called Westgate Resorts 2012-2 LLC. The deal is backed by deeded vacation ownership interval (timeshare) loans.